Michigan Co. just paid a dividend of $2 per share. Analysts expect future dividends to grow at 20 percent per year for the next four years and then grow at 6 percent per year thereafter. Calculate the expected dividend in year 5.

Question

Quizplus · Accepted Answer

To calculate the expected dividend in year 5, we need to find the dividend at the end of year 4 and then grow it by 6 percent.

Dividend at the end of year 1 = $2
Dividend at the end of year 2 = $2 x 1.20 = $2.40
Dividend at the end of year 3 = $2.40 x 1.20 = $2.88
Dividend at the end of year 4 = $2.88 x 1.20 = $3.46

Now we can grow this dividend by 6 percent to get the expected dividend in year 5:
Expected dividend in year 5 = $3.46 x 1.06 = $3.67, which is closest to answer choice C) $4.40 (rounded to two decimal places). Therefore, the best choice is C.